Important Factor Needs to Consider while Calculating EMI

Personal Loans have made lives easy for many people, which is why they are considered one of the best solutions to short term liquidity problems. Applicants like the idea of having a loan than can be used for anything that they want to use it for. There are other loans available in the market, like Home Loans, Student Loans, and Car Loans. Some of these loans don’t need any collateral and are easy to obtain, as there are banks and NBFCs open to offering various schemes. What makes a loan an easy choice nowadays is the accessibility to online loans.

With loans, EMIs are the most important things to consider, as this is the amount that you will need to pay every month. EMI stands for equated monthly installment and is done in order to pay off the loan in small installments instead of a lump sum.

An EMI is made up of two components—a portion of it is used to pay for the principal amount and another portion goes towards paying for the interest. Initially, the interest amount constitutes the most of your EMI payment. As you progress towards the end of the tenure, the portion of your EMI amount made towards interest payment reduces and the portion towards principal increases.

Before proceeding to the factors affecting the calculation of EMI, you need to know what a loan amortization schedule is. Essentially, it represents your EMI payments in a tabular form. This way you can clearly see the breakup between the principal and interest component. By looking at your amortization schedule, you can get a fair idea of how you have to repay the loan and you’ll also know the outstanding balance that is left to be repaid back. It maintains a record of important information like loan tenure, interest rates, principal amount, EMI, and outstanding loan. This schedule is especially helpful if you are looking for refinancing options for this loan or are planning to clear off your debt before time.

Factors Affecting EMI Calculation

The calculation of EMI depends on three factors –

Loan Amount: This is the principal amount or the total amount that you borrow from your lender

Interest Rate: When you borrow, you need to pay an interest on the principal amount, which varies from lender to lender

Loan Tenure: This is the agreed loan repayment period, it might be few months or few years, within which you will need to clear off your debt

All these factors affect one another and the EMI as a whole. Try and look for banks and NBFCs, offering low interest rates. The lower interest rate you get, the lesser interest you’ll need to pay in the long run, and the lower will be your EMI amount. If you opt for a longer tenure, you’ll need to pay a lower EMI and vice versa.

You can easily calculate your EMI in an by using an online EMI calculator, which is what you should do before when you apply for a loan. You’ll need to put in your ideal principal amount, interest rate, and loan tenure. If the EMI is too big, then there are two ways of reducing it, either by increasing the tenure or reducing the loan amount.

However, the lowest interest rate is not the only thing that you should look for. In the end, make sure to calculate the total cost you have to bear for taking the loan. This cost can be calculated based on the total EMI amount you’re paying and the total number of monthly payments you’re making.

How to Calculate EMI?

This is the mathematical formula which EMI calculators use to calculate instalments:

As you can see, the EMI you pay is directly proportional to your loan amount while the lending rate is inversely proportional to the loan tenure.

Why Should you Use an EMI Calculator?

The online EMI calculator is one tool that makes your loan calculations easy and there is no denying that fact. You can calculate your EMI within few seconds, by putting in the other variables. This will also help you compare the loan schemes offered by different banks and NBFCs, so that you can make an informed choice easily. You will get accurate results in no time when compared to sitting down with pen and paper and doing complicated calculations.

Factors Affecting EMI Payments

One of the most important factors that determines your EMI payment is the interest rate. When you have a fixed rate of interest, then you end up paying the same EMI amount throughout the loan tenure. In case of floating rates, the amount varies and depends on the prevailing rates in the market.

Partial prepayments can also affect your EMI payments. When you make partial prepayments towards your loan, the amount gets deducted from your principal amount and this naturally reduces the total interest that you need to pay for the loan. When you make partial prepayments, you’ll be given two options viz. you can either keep the EMI constant or the tenure constant. If you opt for keeping the EMI constant, then the tenure comes down and if you want keep the tenure constant, then the EMI amount gets reduced.

Most banks and NBFCs have their own personal loan prepayment calculator on their website, which you can use to do calculations effortlessly. In fact, you can use any one to know what EMI amount you need to pay almost any lender since the general formula is the same for all.

Arwind Sharma is a financial advisor with an experience of more than 7 years. He has worked for topmost financial firms in India and has been a visiting faculty at many reputed institutes in India. Currently based in Pune, Arwind Sharma is a name to reckon with when it comes to financial management for big brands. A post-graduate in business economics, he is an alumni of Princeton University, USA. During his free time, Arwind teaches children from marginalised sections of society and also work on his blog.

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